Dubai World Artificial Islands

The Dubai Vision: from dust to bust

Until the 19th century, Dubai was a hot desert covered only with sand and dust, occasionally inhabited by nomadic tribes and sea pirates who landed on the coasts sometimes. In the beginning of 1800s, Al Abu Falasa clan established Dubai, which was a dependent of Abu Dhabi until 1833, when the Al Maktoum dynasty took over Dubai from Abu Fasala clan rulers. After that Dubai came under the British in 1892. Dubai became an important port of call for foreign traders and depended on its pearl exports until the 1930s, and its pearls industry was destroyed by the events of World War I and the Great Depression of the late 1920s.

Modern facilities like electricity supply, telephones and an airport were established in Dubai in the 1950s by the British. When oil was discovered in 1966, Dubai offered incentives to international oil companies and the affluent economy of Dubai was set up on oil revenues. Unlike its other neighbors, Dubai has only limited oil and gas reserves that contribute only about 6% of the economy. So it heavily depends on real estate development, tourism and trade for its revenues.

In 1971 Dubai, Abu Dhabi and five other emirates formed the United Arab Emirates (UAE) after the British left that year. As Dubai continued to grow from revenues from oil and trade, the Jebel Ali port was established in 1979, followed by Jafza (Jebel Ali Free Zone). During the Persian Gulf War of 1990 Dubai banks faced massive withdrawal of funds threatening to weaken Dubai, but, as a blessing in disguise, many trading communities from Iraq-invaded Kuwait and Shia unrest-stricken Bahrain moved their businesses to Dubai. Most importantly, Dubai reaped great financial advantage by providing refueling bases to allied forces lead by USA at the Jebel Ali Free Zone during the Gulf War and the 2003 Invasion of Iraq.

The success of Jebel Ali Free Zone was an inspiration and a model to establish Dubai Media City, Dubai Internet City, Dubai Maritime City and others, as Dubai had not much to expect from petroleum and natural gas exploration. So, Dubai turned to other sectors like real estate development for the well-heeled celebrity class of the world, port-development and investments worldwide, creation of the world’s most-sought after artificial island clusters with the most luxurious hotels, apartments, entertainment facilities, etc. Till recession hit the world economy, Dubai was riding on a real estate boom for six consecutive years.

With the real estate boom, Burj Al Arab (the world's tallest freestanding luxury hotel), Burj Dubai (currently the tallest building in the world), The Palm Islands, The World Islands, Burj Dubai and The Dynamic Tower, and many more modern structures were built. These, along with high inflation and a huge increase in cost of living made Dubai the second most expensive city in the Middle East and 20th most expensive city in the world. According to Morgan Stanley’s price index, property prices in Dubai rose 25% in 2008, after a rise of 79% in 2007.

But the global financial crisis forced speculators to sell out their assets in Dubai in view of the market collapse that crashed real estate prices by 41% in the first quarter of 2009, according to real estate consultants Colliers International. And the prices are falling continuously since then.

What is now described as the “Dubai Vision” is the brainchild of one man, Sheik Mohammad bin Rashid al-Maktoum, the ruler of Dubai, who has been accused of running the emirate single handedly, with the help of only his family and friends, and who failed to apply fair rules of open governance. He has outlined his ideas on development in his book “My Vision”. He has told the World Economic Forum last week that the worst of recession had passed for Dubai which was well-placed to continue its development plans. To prove that it was a white lie, news was released just before the Eid al-Adha and the UAE national day (Dec 2) that Dubai World could not pay a US$3.5 billion bond. The total debt of Dubai World being US$ 59 billion and the equally bust Dubai government being US$ 80 billion in debt, Banks in Asia and Europe quickly distanced them from Dubai.

The tell-tale signs of the current crisis were visible for the past several months. Accommodation on rent was unthinkable till last year, but slowly TO-LET boards started appearing on apartments and they are there in about 75% of the dwellings – not surprising as the original Dubai inhabitants are only about 20% of the population, the rest of 80% being expatriate workers, businessmen and others, most of whom have already left now. Roads used to be jammed with traffic and now they are almost deserted. One of the reports said that the airport had over 5000 abandoned cars left by people who escaped to their home countries. Pink slips for workers started many months ago and it is continuing. There are even stranded unemployed workers who cannot afford to pay airfare to catch their return flights. Those who are already employed in Dubai are afraid of losing their jobs any time.

Now the question in most of the financial circles is how the Dubai Bubble is going to affect others around the world. While European banks appear to have the most exposure to Dubai's debt - European banks hold about US$40 billion worth of exposure to Dubai - there are other broader implications. Besides, banks and companies from around the world who lent money to Dubai World are in a tight spot. The problem is not limited to Dubai, but it is considerably extensive considering it has presence in over 100 worldwide cites employing over 50,000 people around the world. Also thousands of big and small companies executing projects for Dubai World are going to be hit badly.

Now the whole hope is pinned on Abu Dhabi, one of the seven emirates and the oil-rich capital of the UAE, which has one of the largest sovereign wealth funds in the world. The Abu Dhabi Investment Authority (ADIA) invests the surplus government funds of UAE.

Al Jazeera and other news agencies report that Abu Dhabi is moving to bail out Dubai World on a selective basis. "We will look at Dubai's commitments and approach them on a case-by-case basis," an unnamed official told the Reuters, adding, "It does not mean that Abu Dhabi will underwrite all of their debts." It simply means that there will not be any immediate relief as Dubai would like to have. Instead of blanket assistance, the selective assistance is likely to disappoint many investors who expected Abu Dhabi to provide a safety net for Dubai.

Experts feel that the Dubai government has to come up with a clear plan in terms of what it wants to do to restructure its institutions and the debts related to them. According to Brian Caplen, editor of The Banker magazine, ‘Dubai's debt default is far smaller than the losses seen in the wake of the US sub-prime mortgage crisis in 2007’. The US exposure to toxic assets during the sub-prime mortgage crisis was US$1,000 billion.

The Dubai Model of development and financial planning were envious to most of the Persian Gulf countries, especially Saudi Arabia and Qatar, and some of them even tried to emulate Dubai, by aping ideas like establishing free trade zones, financial centers, advanced infrastructure, and inviting western capital and expertise. Some of them may even have financial exposure to Dubai. The larger world recession did not hurt many Asian countries much, but the much smaller Dubai Bubble may affect many Asian countries like India, Bangladesh, Sri Lanka, Pakistan, and many others as there is a huge chunk of expatriate population from these countries in Dubai and other Gulf countries. It is feared that other Gulf countries will tighten their purses and even stop hiring workers or even terminate the contracts of the present workers.

Burj Al Arab - view from the Jumeirah Beach Hotel

Burj Al Arab, originally uploaded by Joi.

The Burj Al Arab exclusively houses the world’s only ‘self-proclaimed’ seven-star hotel located in Dubai, UAE and with a height of 321 m (1,050 ft) it is the second tallest building in the world, standing on a manmade island 280 meters offshore from Jumeirah beach. It is designed to resemble the sail of a boat.

The British architect of the building Tom Wright said about the Burj Al Arab, "The client wanted a building that would become an iconic or symbolic statement for Dubai; this is very similar to Sydney with its Opera House, or Paris with the Eiffel Tower. It needed to be a building that would become synonymous with the name of the country."

It took three years to reclaim the land from the sea and but less than three years to construct the building that contains over 70,000 cubic meter (2,500,000 cu ft) of concrete and 9,000 tons of steel. The hotel cost US$ 650 million to build.

Managed by the Jumeirah Group (formerly Jumeirah International Group, an international luxury hotel chain and part of Dubai Holding, owned by the Dubai Government), the Burj Al Arab is one of the most expensive hotels in the world.

Financial markets from Shanghai to New York shaken by Dubai World

The man-made island Palm Jumeirah is one of the artificial islands of the Palm Islands group in Dubai, being constructed by Nakheel Properties, a subsidiary of Dubai World. The other islands in the Palm Islands are the Palm Jebel Ali and the Palm Deira. The photo shows as Palm Jumeirah as seen from the International Space Station, photographed by Expedition 10 Commander Leroy Chiao from the International Space Station in 2005. It is advertised as "being visible from the Moon," and this man-made palm-shaped structure displays 16 huge fronds framed by a 12-kilometer protective barrier. On completion the resort will sport 2000 villas, 40 luxury hotels, many shopping centers, cinemas, other facilities and it is expected to have a population of approximately 500,000 people.

The debts of government-owned Dubai World has triggered of shockwaves across the world’s financial and share markets. Dubai is one of the emirates (states) of The United Arab Emirates (UAE), the others being Abu Dhabi, Sharjah, Ajman, Umm al-Quwain, Ras al-Khaimah and Fujairah. Dubai's main income is from tourism, real estate and financial services, although it was originally built on oil industry, which now contributes only about 6% of the economy.

Dubai World is a Dubai government-owned investment company with main subsidiaries such as Atlantis - The Palm, Dubai Drydocks, Dubai Multi Commodities Centre, Dubai Ports World (the third largest port operator in the world), Inchcape Shipping Services, Island Global Yachting, Istithmar, Jafza, Kerzner, Leisurecorp, Limitless, Maritime City, Nakheel (residential estate development projects), One & Only, Tamweel and Tejari. Dubai World has more than 50,000 employees in over 100 cities around the world, and has huge real estate investments in USA, UK, South Africa and many other countries.

Due to global recession Dubai's real estate market took a downturn after a six-year boom. On 25 November the Dubai government announced that Dubai World intends to ask its creditors to extend repayment of debts until 30 May 2010. Months earlier Dubai World’s accounted debt was US$ 59 billion, which is about 75% of Dubai government's US$ 80 billion debt. Soon after the announcement, Asian equity markets crashed 3 to 5 percent. It was followed by knee-jerk reactions of financial institutions and investors in Europe, USA, Canada and many other parts of the world, including Japan.

Most financial analysts expect the Arab Monetary Fund, based in Abu Dhabi, the capital of the United Arab Emirates, to avert a financial crisis, as Dubai’s economy has shaken financial markets from Shanghai to New York. As Dubai brought back memories of the mortgage meltdown that led to the worst recession since World War II, some investors in US were busy buying US Treasury bills, pushing the US dollar up and bringing down the stock market and the price of gold and oil.

Upheaval in trading calmed down when European banks and governments around the world said that their exposure to Dubai World's debt is not a cause of worry. Credit Suisse, UBS AG, Barclays, ING Groep INV and Deutsche Bank said their exposure to Dubai World's debt is not going to have any significant impact on them, followed by similar announcements by the governments of Brazil, India, Philippines and Taiwan.

US banks’ exposure to Dubai World is only US$ 9.9 billion while it is US$ 49.5 billion for UK banks. Japan's top banks have hundreds of millions of dollars sunk in Dubai World, and Japan's largest banks Mitsubishi UFJ Financial and Sumitomo Mitsui are among the consortium of 11 creditors that lent to Dubai World. The remaining lenders are mostly European banks and Middle East banks lending about US$ 16.5 billion.

Most analysts feel the current market reaction is an overreaction because Dubai World’s short-term debt could be only about US$ 20 billion and medium-term debts about US$ 80 billion, whereas UAE’s Abu Dhabi Investment Authority alone manages over half a trillion US dollars. Abu Dhabi is one of the wealthiest states in the world and analysts feel it can easily bail out Dubai, both being prominent emirates of the UAE.

Can Yuan replace the US Dollar?

The Chinese currency Yuan may well be an alternative to the US dollar in the coming 15 years, if we take the opinion of the World Bank president Robert Zoellick seriously, and, of course, other indications in the international trade trends. And it will be what the Euro could not, over the years as well as the future trends indicate. The biggest advocate pushing forward the Yuan’s case is the Chinese government itself.

There has been a consistent demand from China before international financial forums and trade and trade regulatory bodies that the American dollar must be replaced by a better and more stable alternative currency in view of the volatility of the US dollar. Interestingly, China holds the largest US dollar funds outside the US and China is one of the biggest trading partners of USA. Maybe, for the same reason, China is a bit upset about the performance of the dollar.

“Though the Yuan cannot be used easily overseas now, it will become more internationalized over the next 10-15 years”, said Robert Zoellick. “This does not mean the Yuan will replace the dollar, but it can provide an alternative”, he said.

It may be noted that there has been a persistent demand from the US and other trading partners of China to adjust the Yuan value in terms of the US dollar, which is state-controlled and often manipulated to suit China’s interests.

Yet another important point to note is that since December 2008, China has entered into agreements worth $95 billion (650 billion Yuan) for currency swap with the central banks of South Korea, Malaysia, Belarus, Indonesia, Argentina and Hong Kong to avoid being hit unfavorably by the US dollar’s fluctuations.

According to Zoellick, Yuan is not ready to become the global reserve currency as yet. But he added that the US consumers are no longer the engines of global demand and they should ponder over the possibility of the dollar no longer remaining the international reserve currency.

The Euro and Pound Sterling have been more stable and consistently improved over the dollar in recent times. But they are limited in exchange rate applications worldwide and their relevance as global currencies is not widely accepted, though Euro has a wider appeal because of its prevalence in most of the European trade and commerce. As it comes to the Yuan, unless one is exposed to the Chinese trade and culture, it largely remains unknown in the case of people of many countries.

It is for the international trading community and the people of the world to decide upon a commonly acceptable global reserve currency, if the dollar is forced to the backseat in favor of the Yuan, and it should not be left to the decision of only the World Bank or its officials to decide. The serious objection to the Yuan still remains as its value can be manipulated by the government of China, which is not even a democracy. All of China’s media and policy making, including monetary and trade decisions are controlled by the Chinese communist party, not the market forces like demand and supply. So, Yuan the value of which is set arbitrarily cannot be acceptable as an international reserve currency.

More reasons to invest in gold

Less than three months ago I wrote in this blog about the trend of gold prices and suggested it as an investment opportunity at times of recession and unpredictable market situations affecting stock prices and traditional investment channels. In the article titled Invest in gold to beat inflation, I verified the significance of investment in gold quoting past instances. For example, since April 2001 the price of gold more than tripled, the highest 2009 price was on February 20, 2009 at $989, fluctuating between $870 and $993 till September first week when gold prices broke the symbolic barrier of $1000 an ounce. Now it has hit yet another milestone of $1,174 on Monday.

The percentage rise in gold prices from September 2008 to September 2009 was 21%. But now, in less than three months gold prices jumped up 17.4%, which will work out to roughly 70% on an annualized basis. But do not expect such an unrealistic rise, though you can safely expect around 20% increase in the coming one year.

Generally, the price of gold increases around this period of the year in Asian countries because of the marriage season for which winter months are preferred. The price of gold in India has already hit a record high of Rs 17,557 per 10 grams. One of the reasons analysts point out is that the dollar fell on Monday after comments from a U.S. Federal Reserve official that U.S. monetary policy would stay ultra-loose for a prolonged period. As everyone knows the weak dollar enhances gold's appeal as an alternative investment. Also the rising crude prices boost gold's appeal as an inflation hedge, most analysts feel.

There are more reasons why there can be a further spurt in prices as the coming seasons of Christmas and New Year also prompt people to buy more gold jewelry as a traditional way of celebration. If there is no panic selling by business investors because of their urge for profit-taking, or other unseen reasons, the trend is expected to continue at least till February 2010.